Saudi Paper Manufacturing's (TADAWUL:2300) Returns On Capital Are Heading Higher

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Saudi Paper Manufacturing (TADAWUL:2300) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Saudi Paper Manufacturing is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.04 = ر.س23m ÷ (ر.س925m - ر.س355m) (Based on the trailing twelve months to June 2022).

Therefore, Saudi Paper Manufacturing has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 8.0%.

Check out the opportunities and risks within the XX Forestry industry.

Above you can see how the current ROCE for Saudi Paper Manufacturing compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Saudi Paper Manufacturing here for free.

What Does the ROCE Trend For Saudi Paper Manufacturing Tell Us?

We're delighted to see that Saudi Paper Manufacturing is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 4.0% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 35%. Saudi Paper Manufacturing could be selling under-performing assets since the ROCE is improving.

The Bottom Line On Saudi Paper Manufacturing's ROCE

In the end, Saudi Paper Manufacturing has proven it's capital allocation skills are good with those higher returns from less amount of capital. Since the stock has returned a solid 90% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Saudi Paper Manufacturing does come with some risks though, we found 5 warning signs in our investment analysis, and 4 of those shouldn't be ignored...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.